Like other never-ending chores such as brushing your teeth and doing the laundry, you may sometimes feel as though you'll be saving for retirement until your dying day. Not true! All that saving will someday pay you back handsomely by letting you turn your favorite hobby, whether it's antique collecting or visiting the grandchildren, into a full-time occupation.
How do we fare once we get to retirement? The Employee Benefit Research Institute recently looked into this question by studying the changing levels of income and wealth between 1992 and 2004 for people age 65 to 75, currently at or beyond the traditional retirement age.
The picture is decidedly mixed.
The majority of retirees seem to be starting out their retired lives with a reasonable amount of success and maintaining their income and assets. But, for anyone unlucky enough to be in the minority who have seen their wealth decline, the picture's not so rosy.
People who saw their total wealth decline over the period studied lost an average of more than 5% per year. When the researchers looked solely at financial wealth (ignoring whether an increasing housing value had boosted these households' total wealth), the average annual decline measured 9%.
What's the problem? When you retire, you're supposed to start spending all that money you worked hard to save, right?
That's true, but it's important to know the limits on how much you can spend each year. You'll want to prevent the terrible possibility that your money will run out sooner than you expected, lest you someday lack the cash for antiquing trips -- or something much more dire, like medical expenses or food.
The findings of this research raised red flags because, the EBRI said, research shows that retirees should spend less than 5% of their assets each year to ensure that their money does not run out within 30 years.
Take a free trip through the Rule Your Retirement newsletter, and you'll find a very similar recommendation. The retirement gurus who populate that Foolish corner of the universe recommend that retirees withdraw 4% of their assets each year, and increase the amount each year to keep up with inflation.
The best research they've looked at concludes that spending money from your assets at rates exceeding 5% reduces the possibility that you'll still have money to live on 15 years later. So, knowing the right withdrawal rate can prevent a truly unfortunate future that leaves you with little money in your most golden years.
What else can you do to make sure you're well prepared for retirement?
- Keep some money invested in stocks. Your investments should get more conservative as you approach the moment when you're going to use your long-saved money to fund your retirement. However, you will not spend it all at once. If you retire at age 65 and live to be 85, that's 20 long years that some of your money will be waiting around in the bank. You probably now have money invested in stocks that you don't plan to use for another 20 years. The same logic that leads to you toward stocks now -- an exchange of higher risk for potentially higher rewards -- can apply to some of your retirement funds.
- Give some thought to how you'll cover routine and catastrophic medical costs in retirement. The EBRI study showed a greater likelihood of declining wealth for people in poor health. If you have health struggles already, you know you must plan for these expenses. Even the healthiest among us, however, could benefit from pondering this expensive eventuality.
- Watch your debt. The data the researchers used did not include any information that explains what contributed to these retirees' decline in wealth. However, they speculated that increasing spending and debt may account for much of the change, given the recent increases in stock and housing wealth. If you're nearing retirement, act now to wipe out any consumer debt you might be carrying. Make sure your retirement planning includes a sufficient income cushion to prevent you from accumulating such debt once you've told the boss you're gone for good.
The 4% withdrawal rule is only one piece of great advice you can get from taking the Rule Your Retirement newsletter for a free spin. Take a look, too, at the Retirement Center for more advice about planning and investing for that phase of your life.
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